2024-07-10 07:01:09
The initial results of the French early parliamentary election runoff have brought some big surprises and a parliament without a clear majority that could prove to be a challenge for both political and financial markets, reported CNBC, quoted by BTA.
According to initial estimates, the left-wing New Popular Front coalition will win the most seats in the election, with French President Emmanuel Macron’s party and its allies in second place and the far-right National Assembly in third.
Following the publication of the exit polls, the euro was down about 0.3 percent against the US dollar in light trade yesterday evening.
Ahead of the second-round vote, analysts at US bank Citi warned that stock markets may be too optimistic about the French election, but that if no government is formed it could “mean between 5-20 per cent -low stock market valuations.”
“Coupled with our finding that French stocks tend to be more volatile than those of other developed countries when elections are held, this may be reason to expect further volatility… In this context, a 10 percent move in French shares is typically accompanied by an 8 percent move in the pan-European Stoxx 600,” the analysts said.
The investment company “Daiwa Capital Markets” (Daiwa Capital Markets) commented on the looming political uncertainty if no party manages to win an absolute majority. During the week, analysts at the company said a grand coalition of moderate left and centrist parties, a unity government or a minority government were possible outcomes.
“Regardless, uncertainty about the outlook for French politics is likely to be long-lasting,” they added.
Cost concerns
Plans for tax changes and budget spending by the left-wing New People’s Front coalition and the far-right National Assembly have been a major cause for concern since early elections were announced.
France is facing challenges over its fiscal position, with the European Commission announcing two weeks ago that it intends to place the country in an excessive deficit procedure (EDP) due to its inability to keep its budget deficit within 3 percent of gross domestic product. The excessive deficit procedure is an action taken by the European Commission against any member state of the community that exceeds the budget deficit ceiling or fails to reduce its debts.
“A fragmented parliament means it will be difficult for any government to pass the budget cuts France needs to comply with EU budget rules and put its public debt on a sustainable path,” said Jack Allen-Reynolds, economist at “Capital Economics”, immediately after the exit polls were published.
Anxiety has spread through France’s bond market in recent weeks. The premium on the country’s borrowing costs, compared with Germany’s, is trading at its highest level since 2012.
The yield on France’s benchmark 10-year government bond also rose above 3.3 percent, a roughly 12-month high since snap elections were called by President Macron in mid-June.
David Roche, president and chief strategist of investment firm Independent Strategy, said early indications of a left-wing alliance victory could actually be worse for the economy than a National Assembly government. He added that any relief from avoiding an outright victory for Marine Le Pen’s far-right coalition would be short-lived and recommended shorting French government bonds against German “where the spread is only 70 basis points”.
Shorting involves betting that the price of an asset will fall.
“This is a ‘hung parliament’ with an unstable union negotiated by a discredited president, but without a political agenda,” he added.
Holger Schmieding, chief economist at Berenberg Bank, sees such a parliament as the most likely and less negative scenario since the election was first announced by Macron.
“However, it is still not a good result, to say the least. It means the end of Macron’s pro-growth reforms. Any government, whether still led by current Prime Minister Gabriel Attal or someone else, will be looking to get a lot done.” Schmieding said.
Shane Oliver, chief economist and head of investment strategy at AMP Capital Investors, said a “hung parliament” would not be good for reform and deficit reduction. But from a market perspective, this could be seen as the best outcome, “as it would reduce the chance of conflict over fiscal policy and prevent the extremist policies of the far-right National Assembly.”